value call- oil & gas - may 29'2015

ValueCallMay29,2015

Oil and Gas

TSL Rese

arch

Exploration & Production Sector USD60/bbl: New floor set for Arab‐light crude oil After the lackluster FY15, we foresee gradual recovery in international crude oil

prices in addition to production growth for Pakistan E&P companies in years to

come. Furthermore, lower probability of any significant dry well along with afore‐

mentioned factor would bring profit growth of 8% for Taurus E&P universe in FY16

vs. –25% in FY15, which would further rise to +15% in FY17.

Pakistan E&P sector has underperformed the benchmark KSE100 index by 35% in

FY15TD after steep fall crude oil prices. However, the price correction wave is now

offering undemanding valuations after the change in crude oil prices outlook. At cur‐

rent valuations, TSL E&P universe is trading at FY16F PE of 8.1x and FY17F PE of

7.1x, along with the dividend yield of 6%. In the sector, POL remains our Top pick

which is offering 25% upside along with dividend yield of 11% to our Dec‐15 TP of

PKR475/share.

Long term view: Crude oil likely to rise towards USD75/bbl

Though crude oil price is hovering around USD60/bbl, we foresee settling crude oil prices as i)

global economic recovery would bring some demand back, ii) peaking U.S. oil inventories

would normalize after falling Shale production and rigs count while iii) threats of further sup‐

ply from Libya and Iraq are unlikely to materialize owing to prevailing civil unrest and disrup‐

tions.

Going forward, we have kept our crude oil assumption at USD60 and USD65 per barrel for

FY16 and FY17, respectively while our longer term crude oil price estimation remains intact at

USD75/bbl.

Crude oil production to touch a new peak of 105k bpd

Flashing light on domestic crude oil production, FY15 remained excellent year for the Paki‐

stan E&P sector as crude oil flows have surged by 24% to ~96kbpd on the back of enhanced

flows from Nashpa, Makori East, Adhi, Ghauri, Rajian, Aassu (BP), Murid (BP), Mehar

(Petronas).

In FY16, we expect the production to rise further by 10% due to incremental flows of 7.1k bpd

of oil (up 7.2%), 180mmcfd of gas (up 4%) and 875MT/d of LPG (up 1.8x). Flows from KPD‐

TAY (expected to come online by Dec’15) will be the primary contributor (4k bpd oil,

130mmcfd gas and 410MT/d LPG) towards additional flows of OGDC. Furthermore, incre‐

mental flows from Adhi will be the major contributor towards production accretion of PPL

and POL.

Please refer to the last page for Analyst Certification and other important disclosures.

Continued on page 2

Usman Riaz AC [email protected] Direct: +92‐21‐35216403

PKR Target Price Stance

POL 475 BUY

OGDC 233 BUY

PPL 196 BUY

TSL E&P Sector

Source: TSL Research

POL FY14A FY15E FY16F FY17F

EPS 54.5 41.1 46.0 54.1

DPS 52.5 40.0 44.0 52.0

P/E (x) 7.0 9.2 8.3 7.0

P/BV (x) 2.6 2.5 2.5 2.5

D/Y 14% 11% 11% 12%

EPS growth 19% ‐25% 12% 18%

ROE 38% 27% 30% 35%

EV/EBITDAX 3.2 3.9 4.0 3.4

OGDC FY14A FY15E FY16F FY17F

EPS 28.8 21.1 22.6 26.6

DPS 9.3 9.3 9.3 10.0

P/E (x) 6.7 9.1 8.5 7.2

P/BV (x) 2.1 1.8 1.6 1.4

D/Y 5% 5% 5% 5%

EPS growth 36% ‐27% 7% 18%

ROE 35% 21% 20% 21%

EV/EBITDAX 3.8 4.4 3.9 3.2

PPL FY14A FY15E FY16F FY17F

EPS 26.1 20.2 20.9 22.6

DPS 12.5 9.5 9.0 9.5

P/E (x) 6.4 8.3 8.0 7.4

P/BV (x) 1.8 1.6 1.5 1.3

D/Y 7% 6% 6% 7%

EPS growth 2% ‐22% 3% 8%

ROE 31% 21% 19% 19%

EV/EBITDAX 3.4 3.9 3.8 3.1

Source: Taurus Research

FY14 FY15F FY16F FY17F

Price to Earnings (x) 6.6 8.8 8.1 7.1

Earnings Growth 31% ‐25% 8% 15%

Dividend Yield 6% 5% 6% 7%

Return on Equity 31% 22% 21% 22%

Price to Book (x) 2.0 1.8 1.6 1.5


TSL E&Ps Universe

ValueCall TSLResearch

Taurus research is available on Bloomberg under TAUR & on Capital IQ

Recap: Why global crude oil prices collapsed last year?

Global crude oil prices have plummeted by around 46% during 11MFY15. This is primarily due to

recent i) Shale oil/gas boom, ii) OPEC denial to cut supply, iii) falling global demand due to slow‐

down in major economies (China, Europe and Japan), iv) strong USD led fall in Dollar commodity

prices and v) political rifts of USA (against Russia) and KSA (against Iran).

Jul’14: Higher oil prices triggered Shale boom

Previously, impermeable rock formations were resistant to the vertical drilling while higher cost of

horizontal drilling/fracturing kept US oil production capped. However, sticky crude oil prices, dur‐

ing CY11‐14, above USD100/bbl, provided buffer to the Shale oil producers to invest in expensive

horizontal drilling and hydraulic fracturing technology. Now, as per latest estimations, the cost of

horizontal drilling has significantly reduced to around USD1.5mn/well. Not only new technologies

and lower costs have improved margins for the Shale oil producers but it also resulted in global

supply glut; hence skidding oil prices.

Just to highlight, US Shale production has boomed to 9.42mn bpd vs. average of 5‐7mn bpd in

2007‐13. Alone in Bakken formation (North Dakota), Shale oil production has surged to more than

1.1mn bpd (Dec’14) from the low of 2.5kbpd in 2005.

Nov’14: But OPEC voted to keep production intact

Falling prices usually prompt crude oil exporting countries to trim their production in order to keep

stronger prices and to meet their budget targets. However, OPEC (Organization of Petroleum Ex‐

porting Countries) did not do the trick this time and maintained production in order to retain their

global market share. This rigid stance further weakened the oil prices to USD41.4/bbl in Jan’15

from its Jun’14 crest of USD111.2/bbl (down 63%). OPEC decision was, reportedly, aimed to turn

Shale oil production unfeasible and to hit economies of other crude oil producers (Iran & Russia).

Just to mention, OPEC is currently pumping around 31mnbpd (about 33% of global supplies).

Jan’15: However QE in Europe & seasonal demand supported prices to above USD58/bbl

CY15 started with some recovery in global crude oil prices, as seasonal winter consumptions cou‐

pled with initiations of quantitative easing program in Europe spurred demand growth. As a result,

Arab‐light crude oil prices (along with WTI & Brent) jumped by 42% to USD58.6/bbl.

However, the rebound remained short lived and prices started moving southwards again due to

slow down in buying of crude oil from US & China after meeting their strategic reserves targets.

Further, potential ease in economic sanctions on Iran resulted into fear of intensifying supply glut. Continued on page 3

North Dakota Crude Oil Production (mn bbls)

Source: EIA & Taurus Research

0

5

10

15

20

25

30

35

2008

2009

2010

2011

2012

2013

2014

US Net Imports from OPEC (mn bpd)


‐

1

2

3

4

5

6

7

Aug

‐08

Feb‐09

Aug

‐09

Feb‐10

Aug

‐10

Feb‐11

Aug

‐11

Feb‐12

Aug

‐12

Feb‐13

Aug

‐13

Feb‐14

Aug

‐14

Feb‐15

USA Crude production and Import (mn bbl/d)


‐

2.0

4.0

6.0

8.0

10.0

12.0

2008

2009

2010

2011

2012

2013

2014

2015E

Production Imports

OPEC crude oil production (mn bbl/d)


20.0

24.0

28.0

32.0

2008

2009

2010

2011

2012

2013

2014

Arab‐light Crude Oil Price (USD/bbl)

Source: Bloomberg & Taurus Research

0

20

40

60

80

100

120

140

May‐12

Sep‐12

Jan‐13

May‐13

Sep‐13

Jan‐14

May‐14

Sep‐14

Jan‐15

May‐15


High forex reserves provide cushion to Arabs

Previously, it was widely perceived that crude oil prices would not decline beyond a certain level, as

crude oil‐exporting countries (especially Gulf) rely on these proceeds to balance their country

budgets. To recall, Saudi Arabia, world’s largest producer of oil, balances its budget at around

USD80/bbl of crude oil.

However, Shale oil boom in U.S. and crude oil production from Brazil came as serious threats to

the market leadership of OPEC. To retain market share, Gulf monarchies started offering lucrative

discounts on their crude oil sales instead of lowering production.

Considering forex reserves levels, production costs and expenditures plans, Arab exporters can

bear low prices for a relatively longer period while Iran, Venezuela and Russia would have to cut

expenditures. Moreover, breakeven prices for OPEC are around USD20‐30/bbl, way lower than

Non‐OPEC and shale producers.


Continued on page 4

Forex Reserves (USD billions)

Source: IMF & Taurus Research

‐

150

300

450

600

750

KSA

Brazil

Russia

Iran

Libya

UAE

Breakeven crude prices (USD/bbl)

Source: WSJ & Taurus Research

‐20

40 60

80 100

120

140 160

Libya

Venezuela

Russia

Iran US

Iraq

Qatar

UAE

Kuwait


Crude oil price expected at USD60‐65/bbl in next 2 years

During 11MFY15, Arab‐light crude oil prices have declined by 45% at USD59.6/bbl compared to

USD108.4/bbl in FY14. We believe, current situation of crude oil price (~USD60/bbl) is likely to lin‐

ger on and spill over its affects in first half of next fiscal year. Afterwards, we expect crude prices to

languish towards recovery.

For 4QFY15, we have kept our benchmark crude oil price assumption at USD58/bbl. Further, we

foresee gradually settling crude oil prices in coming months as volatility is advancing towards ease.

Going forward, we have kept our crude oil assumption at USD60 and USD65 per barrel for FY16

and FY17, respectively while our long‐term assumption remains intact at USD75/bbl.

Following are the key factors, which would drive future oil prices

Global economic recovery to bring some demand back

Slowdown in China, looming recession in Japan and weakness in the Eurozone have put downward

pressures on crude oil demand, resulting in widening supply glut to around 2mn bpd. Now, Euro‐

zone has broken the deflationary spell, thanks to the initiation of ‘Quantitative Easing’. Further,

demand from China would also improve on the back of additional refining capacities and industrial

growth in addition to completion of third phase of strategic petroleum reserves (in China).

Peaking U.S. Inventories to normalize after falling Shale production and lower rigs count

After the slump in crude oil prices and thinning margins, U.S. Shale drillers have now stepped back

from aggressive drilling. This can be gauged from the fact that oil rigs count has depicted a mas‐

sive drop of 950 (59%) to 659 from a peak of 1,609 in Oct’14. Despite this, U.S. commercial crude

oil Inventories have reached to 491mn barrels, highest in at least last 80 years. Just to mention,

these stockpiles are over and above the strategic petroleum reserves (nearly 700mn barrels) held

by U.S.

We opine, in coming weeks, oil inventories would normalize owing to reduced rig count and sliding

Shale production, which might bring some respite in WTI crude oil price.

Supply threat from Libya and Iran may not materialize

Due to civil war in Libya and sanctions on Iran, almost 1.7mn bpd of oil is off‐market. Libya’s crude

oil production, which rebounded to almost 900k bpd in Oct’14 (peaked to 1.6mnbpd in CY11), has

dropped to 200‐250kbpd due to country’s civil war. We believe civil war in Libya is likely to prevail

for some time, keeping crude oil supplies off the global markets.


Continued on page 5

World Oil Demand and Supply (mn bpd)


86

87

88

89

90

91

92

93

94

95

1Q2012

2Q2012

3Q2012

4Q2012

1Q2013

2Q2013

3Q2013

4Q2013

1Q2014

2Q2014

3Q2014

4Q2014

1Q2015

Demand Supply

US Crude Oil Inventories (mn bbls)


250

300

350

400

450

500

Apr‐08

Oct‐08

Apr‐09

Oct‐09

Apr‐10

Oct‐10

Apr‐11

Oct‐11

Apr‐12

Oct‐12

Apr‐13

Oct‐13

Apr‐14

Oct‐14

Apr‐15

Baker Hughes Rigs Count (weekly)


300

500

700

900

1,100

1,300

1,500

1,700

10‐Oct‐14

31‐Oct‐14

21‐Nov

‐14

12‐Dec

‐14

02‐Jan

‐15

23‐Jan

‐15

13‐Feb

‐15

06‐M

ar‐15

27‐M

ar‐15

02‐Apr‐15

27‐M

ar‐15

2012 2013 2014

Saudi Arabia 7.6 7.6 7.6

Russ ia 4.8 4.7 4.9

Iraq 2.4 2.4 2.7

Iran 2.1 1.2 1.2

Libya 1.0 0.6 0.3


Major exporter of crude oil

2012 2013 2014

USA 8.5 7.7 7.3

China 5.4 5.7 6.2

India 3.6 3.8 3.9

Japan 3.5 3.4 4.3

South Korea 2.6 2.5 2.7


Major importer of crude oil


Further, nuclear talks between the Western powers and Iran had resulted in a preliminary deal

while ease/removal in international sanctions on Iran carries a potential of additional 1mn bpd of

additional supply of crude oil in international market. Nevertheless, we see little chances of that

happening because of sturdy response from US congress and Israel.

OPEC has lost its price dictatorship

Historically, OPEC used to drive global crude oil prices due to their significant influence in the mar‐

ket. However, OPEC size is continuously reducing in the global oil production pie due to competi‐

tion within Arab countries and rising production from non‐OPEC countries (US, Brazil and Africa).

Now, cut from OPEC, to prop up prices, may be aggressively compensated by other players. So,

OPEC (alone) is unlikely to announce any major production cut in Jun’15 meeting as they would

prefer market share instead of higher price. In another scenario, going forward, OPEC might con‐

sider curbing output, only if all key crude oil producers, including OPEC, Russia and Brazil join

hands.

Devil’s Advocate

Yemen crisis may not disrupt oil supplies as feared

Yemen is the main route of shipments of Arabian crude oil to Europe, which passes by the Yemen

coast‐line via the Gulf of Aden on route to the Suez Canal every day. There is a fear that growing

strength of Houthi rebels in Yemen can lead to further unrest in Middle East and may paralyze the

transportation of oil shipments from Sunni majority countries (Saudi Arabia, Kuwait and Qatar).

To avert the situation, as Saudi led coalition forces have started strikes against Houthi rebels in

Yemen, we see little chances of disruption of crude oil supplies from Yemen.

Crude oil prices may dip by stronger USD

USD has been appreciated against a basket of currencies, reaching decade high levels of 97.53, up

21% FY15TD, which is also one of the culprits of the falling global crude oil price. To recall, global

prices are normally denominated in US Dollar, which makes commodity prices inversely correlated

to the US dollar movement. U.S. Federal Reserve System (FED) has tightened its stimulus and now

mulling towards raising key interest rate at the end of CY15, due to escalating sanguinity in eco‐

nomic recovery. If this happens, USD would further strengthen and may lead to another dip in in‐

ternational crude oil prices.


Continued on page 6

Crude oil production (mn bbl/d)


‐

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2009

2010

2011

2012

2013

2014

Iran Libya

Highest Crude oil producers (mn bbl/d)


‐

2.0

4.0

6.0

8.0

10.0

12.0

Russia

KSA

USA

Iran

China

Canada

Iraq

UAE

Mexico

Kuwait


Rising domestic crude oil production to partially compensate for lower barrel price

Oil production soaring after a decade long halt

Hydrocarbon production of E&P Sector of Pakistan remained stagnant during 2004‐2012, due to

heavy reliance on old technology (2D seismic activity) which has lower success ratio in locating

Hydrocarbon enriched formations. As a result, crude oil flows lingered around 65kbpd while gas

production kept hovering around 4.0bcfd during the aforesaid period. Now, with the use of latest

and more reliant technology (3D seismic activity), country’s oil production is near to cross 100k

bpd, thanks to enhanced flows from Nashpa, Makori East, Adhi, Ghauri, Rajian, Aassu (BP), Murid

(UEPL) and Mehar (Petronas).

On the other side, gas production is continuously declining due to fewer discoveries and maturing/

aging fields (Qadirpur, Sui, Manzalai, Sawan, and Bhit). Consequently, Oil & Gas sector of Pakistan

is gradually skewing towards crude oil, which was once dominated by gas flows.

FY16 crude oil would further grow by 10% to 105kbpd

Production flows from Makori East (Tal block), Nashpa and Adhi have witnessed healthy rise in the

ongoing fiscal year. In FY16, we expect production to further rise by ~10% due to incremental flows

of 7.1k bpd of oil (up 7.2%), 180mmcfd of gas (up 4%) and 875MT/d of LPG (up 1.8x).

Furthermore in FY16, KPD‐TAY (expected to come online by Dec’15) will be the primary contribu‐

tor (4k bpd oil, 130mmcfd gas and 410MT/d LPG) towards additional flows of OGDC. Furthermore,

incremental flows from Adhi will be the major contributor towards production accretion of PPL and

POL.

However, in case of delay in materialization of these flows, our FY16 earnings would decline by

approximately 7.5%.


Continued on page 7

Crude Oil Production (bpd)

Source: PPIS & Taurus Research

‐

5,000

10,000

15,000

20,000

25,000

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

Nashpa Makori East

Gas Production (mmcfd)


‐

100

200

300

400

500

600

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

2QFY14

3QFY14

4QFY14

1QFY15

2QFY15

Sui QadirPur Kandhkot

Fields Date Oil (BPD) Gas (mmcfd) LPG (M/T)

Adhi Aug'15 2,000 25 125

Jhal Magsi Nov'15 15

KPD Dec'15 4,000 130 410

Nashpa May'16 1,120 10 340

Total 7,120 180 875

Source: Company Accounts & Taurus Esitmates

Arab‐Light Price OGDC PPL POL

Bear Case (USD 50) 21.1 19.4 39.7

Base Case (USD 60) 22.6 20.9 46.0

Bul l Case (USD 70) 24.1 22.5 52.3

FY16 EPS Sensitivity Relative to Crude Price


W/A WO/A YoY

OGDC 22.6 20.5 ‐9.1%

PPL 20.9 20.0 ‐4.5%

POL 46.0 44.6 ‐3.0%

FY16 EPS Sensitivity With & Without Additions


Crude Oil Production (bpd)


‐

20,000

40,000

60,000

80,000

100,000

FY10A

FY11A

FY12A

FY13A

FY14A

FY15E

Gas Production (mmcfd)


3,750

3,900

4,050

4,200

FY10A

FY11A

FY12A

FY13A

FY14A

FY15E


Large untapped acreage yells future production growth

Exploration and production activities in the E&P sector of Pakistan has picked pace in the last cou‐

ple of years. In previous year, Government of Pakistan has awarded 50 new licenses (21 in Baluchis‐

tan, 15 in Punjab, 8 in KPK and 6 in Sindh). Resultantly, area under exploration has significantly

spread by 350‐370k kms (~42% of total sedimentary area in Pakistan) while seismic surveys and

data acquisition (both 2D and 3D) is also touching its peak levels. In our view, Pakistan E&P sector

is going to witness phenomenal growth in coming years onn the back of substantial exploration

efforts.

Though E&P companies are now more aggressive in exploration activities, Pakistan’s drilling den‐

sity remains stagnant around 2.6 wells per 1000 sq. kms which is largely concentrated in Sindh

province (8 wells per 1000 sq. Kms). Moreover, the total country drilling density is much lower than

the regional average of 10 wells per 1000 sq. kms.

Favorable Petroleum Policies regime to lure towards gas

Mostly wellhead gas prices are linked to USD denominated Arab‐light crude oil prices. Going for‐

ward, companies would likely to improve gas exploratory activities as MNPR (Ministry of Natural

Gas and Petroleum Reserves) is luring them by offering higher wellhead gas prices under 2009 &

2012 polices. Additionally, slab‐supported price mechanism lowers the correlation of wellhead gas

prices with Arab‐light prices. Furthermore, petroleum policy 2012 offers favorable wellhead gas

prices structure which goes as high as USD6.6/mmbtu at Arab‐light crude oil prices of above

USD110/bbl.


Continued on page 8

Wells Planned and Spuded during FY15


11 8

31

18

8

28

6 6

22

7 3

14

‐5 10 15 20 25 30 35 40

OGDC

PPL

Private

Dev OGDC

Dev PPL

Dev Private

Planned Actual

Crude Price (USD/bbl) 30 40 50 60 70 80 90 100 110 120

Zone 1

PP 2001 2.87 3.03 3.03 3.03 3.03 3.03 3.03 3.03 3.03 3.03

PP 2007 (GPG 0.2) 3.01 3.37 3.57 3.61 3.65 3.69 3.73 3.77 3.77 3.77

PP 2007 (GPG 1.0) 3.01 3.37 3.65 3.85 4.05 4.25 4.45 4.65 4.65 4.65

PP 2009 3.45 3.86 4.14 4.41 4.69 4.83 4.96 5.10 5.10 5.10

PP 2012 3.72 4.34 4.96 5.33 5.70 5.95 6.20 6.45 6.60 6.60

Zone 2

PP 2001 2.68 2.84 2.84 2.84 2.84 2.84 2.84 2.84 2.84 2.84

PP 2007 (GPG 0.2) 2.84 3.11 3.27 3.31 3.35 3.39 3.43 3.47 3.47 3.47

PP 2007 (GPG 1.0) 2.84 3.11 3.35 3.55 3.75 3.95 4.15 4.35 4.35 4.35

PP 2009 3.23 3.61 3.87 4.13 4.39 4.52 4.64 4.77 4.77 4.77

PP 2012 3.55 4.14 4.73 5.09 5.44 5.68 5.92 6.15 6.39 6.39

Zone 3

PP 2001 2.50 2.64 2.64 2.64 2.64 2.64 2.64 2.64 2.64 2.64

PP 2007 (GPG 0.2) 2.70 2.90 3.02 3.06 3.10 3.14 3.18 3.22 3.22 3.22

PP 2007 (GPG 1.0) 2.70 2.90 3.10 3.30 3.50 3.70 3.90 4.10 4.10 4.10

PP 2009 3.00 3.36 3.60 3.84 4.08 4.20 4.32 4.44 4.44 4.44

PP 2012 3.38 3.94 4.51 4.85 5.18 5.41 5.63 5.86 6.09 6.09

Source: MPNR & Taurus Research

Gas pricing Comparison of Petroleum Policies 2001, 2007, 2009 and 2012


Shale gas: Another avenue of future production boom

According to various studies and estimates by EIA (Energy Information Administration), Pakistan

has more than 70% sedimentary basin area, which is naturally enriched with a thick Shale forma‐

tions and proven petroleum reserves. Moreover, EIA estimated Pakistan total Shale gas and oil

reserves at around 586Tcf and 227bn bbls, respectively. However, technical recoverable reserves

are projected around 105Tcf and 9.1bn bbls, respectively. Alone in Ranikot formations (West of

Karachi), technical recoverable reserves are projected at 4Tcf of wet gas and 3.3bn barrels of shale

oil/condensate with a success rate of 30%‐40%.

That said, USAID has provided USD1.8 millions in technical assistance for undertaking the Shale

study. Moreover, its been widely reported that samples have been sent to the US and related re‐

search work will be completed in one year. After getting the outcomes, Pakistan might look for

adopting US technology for tapping shale reserves, which would open new endeavors of growth in

E&P sector of Pakistan.

Though the crude oil pricing from Shale gas reserves would be at international crude oil prices,

favorable gas pricing policy is necessary to provide stimulus to the shale gas production. In 2011,

Govt. has outlined a Tight Gas Policy with pricing structure of ~USD6.5/mmbtu. We expect Shale

gas‐pricing structure would slightly be improved from Tight Gas Policy.


Continued on page 9


Pakistan Oilfields Limited ‐ POL ‐ ‘Buy’

Despite oil heavy revenue stream, our conviction for the POL remains affirm with BUY stance at

Dec’15 TP of PKR475/share. POL is offering a lucid DY of 11%, along with potential capital gain

yield of 25%. Further, the scrip is trading at an implied benchmark crude oil price of USD 47/bbl,

since we believe the price correction was unjustified. At current levels, the scrip is trading at a for‐

ward PE of 8.3x to our FY16F earnings estimates.

Moving ahead, not only languish recovery in crude oil prices but rising production and PKR depre‐

ciation would also provide impetus to the profits. In addition, any discovery (Makori East 04) could

reflect significant impact on company’s earnings and valuation in coming future.

Adhi and Jhal Magsi to push flows in FY16

In FY16, incremental flows of 220bpd oil and 7mmcfd gas from JV fields would provide positive

support to company’s revenues. Within this, Adhi (expected in Aug’15) would be the prime con‐

tributor in addition to Jhal Magsi (Nov’15).

Production from Mardankhel and Maramzai may trigger EPS revision

MOL (Tal Block operator) has encountered another discovery from its exploratory well Mardankhel

‐1 in Tal block. As per latest estimations, the well is flowing around 4k bpd of crude oil and

47mmcfd of gas (previous estimates included), translating into earnings estimates of approx.

PKR5.5/share. However, final flows could be materially higher than these numbers as one of the

major formations (Samanasuk) is yet to be tested. Further, we have incorporated incremental

flows from Maramzai from 2QFY16 which would be reflecting into an earnings impact of PKR1.5/

share (annualized).

Margalla North: Future avenues for production accretions

Out of remaining 4 wells (Balkassar, Pindori , Margalla North (MGN 01) and Makori East 4), which

are in high prospecting areas and are moving towards final stages of drilling, we are more sanguine

about prospects of ‘Makori East 4’ and ‘MGN 01’ for favorable results with accretion of potential

reserves and flows. Further, any material discovery from Balkassar, though unlikely, would turn the

situation more favorable for POL.

Key Risk: Tal block remains the primary contributor to oil (71%) & gas (76%) production for POL.

Any disruption in flows could substantially impact the profitability of the company.

Production disruptions: Amongst existing reserves, Manzalai and Pindori have faced significant

drop in flows. However, compression facility is installed on Manzalai to counter its dwindling pro‐

duction. In addition, Tal block is located on a region which is sensitive to law & order situation and

production from Makori East faced temporary weakness in Oct’14 owing to the protest in

neighborhood on royalty sharing.


Continued on page 10

Fields Adhi Jhal Magsi Total

Oil (BPD) 220 220

Gas (mmcfd) 3 4 7

LPG (M/T) 14 14

Source: Company Accounts & Taurus Research

POL PA BUY

Stock price 381.0

Target price 475.2

24.7%

237

90

Free float 46%

3M Avg. dai ly value traded (PKRmn) 330.1

3M Avg. dai ly volume (mn) 0.9

3M High 389.7

3M Low 311.3

Current upside/(downside)

Outstanding shares (mn)

Market Cap (PKR bn)

Block Well Stake Status

Balkassar Balkassar X‐01 100% Final testing phase

Pindori Pindori ‐9 35% Final testing phase

Tal Mardan Khel 01 21% Under dri l l ing and testing

Margal la North MGN 01 30% Advance testing phase

Makori East 4 Makori East 4 21% Final testing phase


Analyst Remarks

Might carry unexpected results

Dri l l ing stopped (excess ive water flow, dry wel l expected)

Condensate (Initia l estimates given)

Bright prospects of Crude

Working for target depth

Price Performance


300

400

500

600

700

800

Mar‐14

May‐14

Jul‐14

Sep‐14

Nov‐14

Jan‐15

Mar‐15

May‐15

POL KSE100INDEX




POL ‐ Key Ratios FY13A FY14A FY15E FY16F FY17F

EPS 45.78 54.48 41.12 46.01 54.12

DPS 45.00 52.50 40.00 42.00 44.00

BVPS 139.29 148.79 150.40 152.21 154.33

P/E (x) 8.32 6.99 9.27 8.28 7.04

P/BV (x) 2.74 2.56 2.53 2.50 2.47

Dividend Yield 12% 14% 10% 11% 12%

Earnings growth ‐9% 19% ‐25% 12% 18%

ROA 20% 23% 17% 19% 21%

ROE 32% 38% 27% 30% 35%

EV/EBITDA 4.80 3.40 4.70 4.44 3.80

EV/EBITDAX 4.35 3.17 3.96 4.03 3.44

EV/Sales 2.87 2.23 2.56 2.51 2.24


POL ‐ Income Statement (PKR mn) FY13A FY14A FY15E FY16F FY17F

Net Sales 28,878 35,540 31,493 31,690 35,065

Operating Costs 7,566 7,608 8,865 9,566 9,795

Royalty 2,734 3,439 2,708 2,896 3,110

Amortization of D&D Cost 2,051 5,201 3,023 2,218 2,279

Gross Profit 16,262 19,010 16,626 16,748 19,587

Exploration Costs 1,792 1,710 3,200 1,824 2,132

Other Income 1,954 1,823 1,621 1,780 2,139

Profit before Taxation 14,551 17,207 13,144 14,707 17,301

Profit after Taxation 10,828 12,887 9,726 10,883 12,802

Balance Sheet (PKR mn)

Is sued Subscribed & Paid ‐up 2,365 2,365 2,365 2,365 2,365

Unappropriated Profi t 30,581 32,829 33,211 33,639 34,141

Total Equity 32,948 35,196 35,577 36,004 36,506

Deferred Liabi l i ties 12,234 13,701 12,741 13,540 15,166

Long‐term Liabi l i ties 12,752 14,339 13,376 14,179 15,873

Trade and Other Payables 6,292 5,782 6,202 6,934 7,029

Current Liabi l i ties 7,938 8,334 7,708 8,812 9,312

Total Equity + Liabilites 53,639 57,869 56,660 58,995 61,692

Property Plant & Equipment 7,801 9,306 9,070 8,822 8,562

Development & Decommis ioning Costs 16,610 13,161 13,356 13,540 13,712

Exploration & Evaluation Assets 2,979 4,666 5,742 6,715 7,739

Total Fixed Assets 27,390 27,134 28,168 29,077 30,014

LT Investment in Associated Companies 9,616 9,616 9,616 9,616 9,616

Total Long Term Assets 37,026 36,771 37,806 38,714 39,651

Stores & Spares 3,525 3,663 3,681 3,899 3,970

Trade Debts 4,871 5,094 4,378 4,764 5,057

Cash & Bank Balances 7,249 10,826 9,599 10,478 11,684

Total Current Assets 16,613 21,098 18,855 20,281 22,041

Total Assets 53,639 57,869 56,660 58,995 61,692



Oil and Gas Development Company ‐ OGDC ‐ ‘Buy’

We recommend ‘Buy’ on Pakistan’s largest listed company, OGDC, with the target price of

PKR233/share. Our conviction originates from i) ramp up production from KPD‐TAY, Tal block

(Makori East and Maramzai) and Nashpa and ii) monetization of production from fields of Sinjhoro,

Saand and Suleman. Moreover, strong reserves replacement and low cost operations are providing

further justification to our investment case. OGDC also stands above its peers in Pakistan with re‐

maining recoverable reserves of about 1,319mmboe, translating into comfortable reserve life of

more than 16 years.

The scrip offers a total return of 26%, including dividend yield of 5% and price upside of 25%. At

current levels, the stock is trading at an attractive FY16F PE 8.5x.

Flows to ascent from KPD and Nashpa from FY16

Going forward, in FY16, KPD‐TAY (flows expected from Dec’15) would be the primary contributor

(4k bpd oil, 130mmcfd gas and 410MT/d LPG) towards incremental flows of OGDC. Further, crude

oil flows from Nashpa are likely to strengthen by another 1.1kbpd to 22kbpd in FY16, which may

further boost to 24‐25kbpd.

Petroleum policies (2001 and prior) to limit falling gas revenues

At one side, crude oil based revenues would bolster on the back of rising crude oil production while

gas based proceeds might remain largely stable despite lower benchmark crude oil price, on the

other side. Wellhead gas prices in Pakistan have a cap and floor (linked with crude oil or HSFO

price) under petroleum policies, which limits the volatility of gas prices in Pakistan at times of fluc‐

tuations in international crude oil prices.

Similarly, wellhead gas prices of key fields of OGDC (Qadirpur, Kadanwari, Uch) are linked to

HSFO while other fields (Mela, Nashpa, KPD, Makori East and Manzalai) are linked to Arab‐light

crude oil prices. As a result, recent free fall in crude oil prices has not affected the gas based reve‐

nues of the company as feared.

Venturing into Shale – a longer‐term view!

Recently, OGDC has inked a contract with ‘Weatherford Oil Tools Middle East, Pakistan’ for exploi‐

tation of unconventional oil and gas reserves i.e. Shale gas, Shale oil and tight gas. In this regard,

transmittal of data to Weatherford has been initiated while abstract Shale gas data from 3 conven‐

tional formations in Manna‐1 & Hanif‐1 were penetrated by the Company.

Furthermore, comprehensive shale gas logs have also been conducted in Manna‐1, Hanif‐1, Pali

Deep‐1 and Saand‐2 to hands on and gauge shale/tight gas prospects. The Company has also iden‐

tified potential horizons of tight gas in 10 wells. Shale is such a project, though longer term in na‐

ture, that may result in stellar growth in production.



Fields Stake Date Oil (BPD) Gas LPG (Tons)

Adhi 50.0% Aug'15 1,000 13 63

Jhal Magsi 56.0% Dec'15 8

KPD‐TAY 100.0% Dec'15 4,000 130 410

Nashpa 56.5% May'16 632 6 192

Total 5,632 157 664


Price Performance

Source:Taurus Research

170

210

250

290

330

370

Mar‐14

May‐14

Jul‐14

Sep‐14

Nov‐14

Jan‐15

Mar‐15

May‐15

OGDC KSE100INDEX

OGDC PA BUY

Stock price 186.0

Target price 232.6

25.0%

4,301

800

15%

180

0.8

221.9

172.4

3M High

3M Low

Current ups ide/(downside)


Market Cap (PKR bn)

Free float

3M Avg. dai ly value traded (PKRmn)

3M Avg. dai ly volume (mn)




OGDC ‐ Key Ratios FY13A FY14A FY15E FY16F FY17F

EPS 21.22 28.81 21.05 22.59 26.57

DPS 8.25 9.25 9.25 9.25 10.00

BVPS 72.60 92.00 104.13 117.38 132.68

P/E (x) 8.76 6.46 8.83 8.23 7.00

P/BV (x) 2.56 2.02 1.79 1.58 1.40

Dividend Yield 4% 5% 5% 5% 5%

Earnings growth ‐6% 36% ‐27% 7% 18%

ROA 24% 27% 17% 17% 18%

ROE 31% 35% 21% 20% 21%

EV/EBITDA 4.47 3.85 4.58 3.97 3.22

EV/EBITDAX 4.11 3.68 4.28 3.72 3.05

EV/Sales 3.39 2.96 3.42 3.02 2.43


OGDC ‐ Income Statement (PKR mn) FY13A FY14A FY15E FY16F FY17F

Sales ‐ Net 223,365 257,014 216,414 227,299 262,328

Royalty 25,899 29,720 25,059 26,302 30,366

Operating Expenses 36,783 48,833 50,148 52,423 60,016

Gross Profit 158,432 176,073 139,259 146,528 169,586

Other Income 15,694 19,126 19,999 21,801 24,841

Exploration and Prospecting expenses 14,980 8,723 11,321 11,674 10,573

General and Administration expenses 2,402 2,965 3,246 3,637 4,066

Workers Profit Participation Fund 7,727 9,071 7,112 7,518 8,843

Profi t before Taxation 146,809 172,350 135,149 142,859 168,021

Profit for the Year 91,273 123,915 90,550 97,144 114,254


Share Capita l and Reserves 312,266 395,671 447,861 504,840 570,663

Deferred Employee Benefits 9,565 9,828 11,793 14,152 16,982

Provis ion for Decommiss ioning Cost 19,994 20,418 22,743 25,067 27,392

Non current l iabi l ties 43,286 52,516 50,145 55,219 63,193

Trade and other payables 56,139 48,046 53,552 50,757 55,730

Current Liabi l i ties 58,377 48,046 53,552 50,757 55,730

TOTAL EQUITY AND LIABILITIES 413,929 496,233 551,559 610,816 689,585

Property, Plant and Equipment 52,605 71,804 76,172 80,204 83,901

Development and Production Assets 74,651 74,329 82,165 87,117 98,155

Exploration and Evaluation Assets 7,275 9,638 11,007 11,823 12,915

Fixed Assets 134,532 155,771 169,344 179,144 194,971

Long term Investments 140,417 140,394 140,418 130,168 119,918

Total Non Current Assets 145,149 146,301 145,198 135,290 125,771

Stores, Spare parts and Loose tools 16,629 18,503 18,348 20,185 21,956

Trade‐debts 55,875 100,511 119,027 125,014 144,280

Other Financia l Assets 39,897 37,537 50,000 50,000 50,000

Cash and Bank Balances 2,710 2,852 10,692 62,588 113,373

Current Assets 134,247 194,160 237,017 296,382 368,843

Total Assets 413,929 496,233 551,559 610,816 689,585



Pakistan Petroleum Limited ‐ PPL ‐ ‘Buy’

We believe in long‐term prospects of the company and counting on monetization of production from Gambat South block for massive Hydrocarbon accretions. PPL is the second largest E&P Company of Pakistan with a recoverable reserve profile of 725mmboe, translating into the reserve life of 13 years. Further, PPL is aggressively acquiring new exploration blocks (26 licenses) as op‐posed to E&P leader OGDC. We have tweaked down our gas prices estimates and have incorporated outlier of other operating expenses (impairment of assets in PPL Europe E&P limited owing to lower reference crude oil prices). Thus, our Dec’15 target price for PPL comes up at PKR196/share and primary valuation method is reserve based DCF, which inherently accounts for the longer‐term outlook of the com‐pany. At current levels, the scrip is trading at an attractive PE of 8.0x to our FY16F earnings esti‐mates and offering a capital gain yield of 16%. Hence, we recommend BUY for PPL.

Aggressive exploration activities to improve production

In terms of oil and gas discoveries during FY15, PPL remained on a progressive note by 6 fruitful discoveries with a potential cumulative additions of 94mmcfd gas and 2.5kbpd oil from Hala and Gambat South block. Moreover, during last week of Dec’14 company’s drilling efforts resulted into a significant prolific discovery in Gambat South block (Faiz X‐1), that flowed up to 2.1k bpd oil and 11 mmcfd gas. We estimate earnings impact of PKR4/share (Arab‐light crude oil at USD60/bbl) with the monetization of Hydrocarbons from Gambat South block as it is under 2009 petroleum policy which offers higher well head gas prices. In FY16, PPL is expected to have incremental flows of 1.1k bpd of oil and 146MT/d of LPG to its production, wherein Adhi (expected to come online by August’15) will likely to contribute the ma‐jor chunk in addition to incremental flows of Nashpa (May’16).

Gas revenues of PPL to remain largely unaffected

PPL is still a gas reliant company as ~58% of its revenues are dependent on gas. While its 2 key gas producing fields (Sui and Kandhkot) contributes around 65% towards gas revenues. The fields have lower limit at the pricing end which restricts downside in gas revenues, as the case remain in recent slump of Arab‐light crude oil price. However, on the back of sluggish wellhead gas prices, gas based revenues as well as earnings would likely to be contained in FY16 due to lagged impact of lower crude oil prices on wellhead gas prices. Going forward, this impact on wellhead gas prices would normalize. While on the crude oil front, we believe growth is likely to come from incre‐mental flows of Makori East and Naspha which would shoulder support to dwindling crude oil reve‐nues.

Key Risk

Company is heavily dependent on the fields of Nashpa (36%), Makori East (28%) and Adhi (17%) for its crude flows. Similarly, it is counting heavily on Sui (50%) and Kandhkot (21%) for its gas produc‐tion. Any disruption in flows of these fields could substantially hurt the profitability of the com‐pany.



Fields Adhi Nashpa Total

Stake 39.0% 28.6%

Oi l (BPD) 780 320 1,100

Gas (mmcfd) 10 3 13

LPG (M/T) 49 97 146


Block Fields Stake Discovery date Oil (bpd) Gas (mmcfd)

Gambat South Wafiq 65% 19 june,2013 293 37

Gambat South Shahdad x‐1 65% 22 july,2013 337 28

Gambat South Sharf X‐1 65% 4 Aug,2014 199 42

Gambat South Kinza x‐1 65% 14 Oct,2014 ‐ 12

Gambat South Faiz X‐1 65% 18 Dec,2014 115 8

Gambat South Faiz X‐1 65% 26 Dec,2014 2,100 11

3,044 139


Total

PPLPA BUY

Stock price 169.2

Target price 195.7

15.7%

1,972

334

24%

316

1.8

186.1

162.7

3M High

3M Low

Current upside/(downside)


Market Cap (PKR bn)

Free float

3M Avg. dai ly value traded (PKRmn)

3M Avg. dai ly volume (mn)

Price Performance


145

195

245

295

345

Mar‐14

May‐14

Jul‐14

Sep‐14

Nov‐14

Jan‐15

Mar‐15

May‐15

PPL KSE100INDEX




PPL ‐ Key Ratios FY13A FY14A FY15E FY16F FY17F

EPS 25.53 26.08 20.24 20.94 22.63

DPS 10.50 12.50 9.50 9.00 9.50

BVPS 75.75 92.26 103.19 114.50 126.72

P/E (x) 6.63 6.49 8.36 8.08 7.48

P/BV (x) 2.23 1.83 1.64 1.48 1.34

Dividend Yield 6% 7% 6% 5% 6%

Earnings growth ‐18% 2% ‐22% 3% 8%

ROA 22% 23% 16% 15% 15%

ROE 31% 31% 21% 19% 19%

EV/EBITDA 4.25 3.76 4.43 4.25 3.52

EV/EBITDAX 3.9 3.5 4.0 3.8 3.2

EV/Sales 2.9 2.6 2.8 2.8 2.3


PPL ‐ Income Statement (PKR mn) FY13A FY14A FY15E FY16F FY17F

Net Sales 102,357 119,811 107,559 108,233 117,462

Field Expenditure 30,603 32,817 37,029 38,220 41,365

Royalties 12,292 14,301 12,878 12,939 14,053

Gross Profit 59,461 72,694 57,652 57,075 62,044

Other Income 6,893 6,381 7,909 7,929 8,199

Other Operating expenses 3,333 4,103 6,521 3,875 4,188

Profi t before Taxation 62,628 74,547 58,689 60,705 65,609

Profit after Taxation 41,951 51,417 39,908 41,279 44,614


Property, Plant and Equipment 70,079 82,636 95,937 110,314 126,060

FIXED ASSETS 70,481 82,914 96,198 110,574 126,319

Long term Investments 55,707 68,552 70,658 72,985 52,807

NON CURRENT ASSETS 128,742 153,594 168,924 185,659 181,274

Trade‐debt 40,337 49,862 49,477 49,787 54,032

Short term Investments 28,339 19,350 22,350 22,350 22,350

Cash and Bank Balances 6,184 2,276 8,526 12,672 41,639

CURRENT ASSETS 84,159 82,749 91,748 95,858 129,319

TOTAL ASSETS 212,901 236,343 260,672 281,517 310,592

SHARE CAPITAL AND RESERVES 149,354 181,917 203,468 225,759 249,850

Decomm Obl igation Provis ion 15,990 15,386 16,276 17,190 18,126

Deferred Taxation 8,908 15,069 12,236 12,656 13,678

NON CURRENT LIABILITIES 26,875 32,685 30,649 32,067 34,027

Trade and Other Payables 33,398 17,916 23,491 20,484 23,270

CURRENT LIABILITIES 36,672 21,741 26,555 23,691 26,715

TOTAL EQUITY AND LIABILITIES 212,901 236,343 260,672 281,517 310,592





Taurus Contact DetailsCORPORATE OFFICE

Address: Suite # 604, 6th Floor, Progressive Plaza, Beaumont Road, Karachi, Pakistan. UAN : (021) 111 82 87 87 Fax : (92) 021‐3568‐6279

Syed Zain Hussain Chief Executive Officer [email protected]

Muhammad Asif Head of Broking 021‐35682690 [email protected]

Tauseef Ladak Head of Sales 021‐35662731 [email protected]

Adeel Ahmed Head of Online Trading 021‐35684228 [email protected]

RESEARCH

Zeeshan Afzal Head of Research Strategy & Economy 021‐35216403 [email protected]

Umair Vayani, CFA Deputy Head of Research Cements & Fertilizers 021‐111828787 Ext: 202 [email protected]

Rohit Kumar Senior Equity Analyst Banks & Oil Marketing Companies 021‐111828787 Ext: 203 [email protected]

Usman Riaz Equity Analyst E&Ps, Refiernies and Automobiles 021‐111828787 Ext: 203 [email protected]

Syed Khurram Equity Analyst Textiles & Power 021‐111828787 Ext: 203 [email protected]

Hasan Azhar Equity Analyst FMCGs & Telecom 021‐111828787 Ext: 203

CORPORATE SALES

M. Aftab Alam Senior Manager 021‐35212946 [email protected]

Feroz Ahmed Senior Manager 021‐35662817 [email protected]

Muhammad Awais Senior Manager 021‐35638350 [email protected]

Khurram Rasheed Senior Manager 021‐35681420 [email protected]

Fahed Fazal Senior Manager 021‐35651128 [email protected]

Peshawar Branch

M. Adeel Resident Representative [email protected]

SUKKUR BRANCH

Syed M. Abbas Shah Resident Representative

Sheroz Shoukat Equity Sales Officer

URL: http://www.taurus.com.pk E‐mail: [email protected]



Analyst Certification

The research analyst(s), denoted AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views ex‐

pressed in this report accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensa‐

tion was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

Disclaimer

This report has been prepared by Taurus Securities Ltd. and is provided for information purposes only. Under no circumstances is to be used or

considered as an offer to sell or solicitation of any offer to buy. While all reasonable care has been taken to ensure that the information contained

therein is not untrue or misleading at the time of publication, we make no representation as to its accuracy or completeness and it should not be

relied upon as such. All such information and opinions are subject to change without notice. From time to time, Taurus Securities Ltd. and/or any

of its officers or directors may, to the extent permitted by law, have a position, or otherwise be interested in any transaction, in any securities di‐

rectly or indirectly subject of this report. This report is provided solely for the information of professional advisers who are expected to make their

own investment decisions without undue reliance on this report. Investments in capital markets are subject to market risk and Taurus Securities

Ltd. accepts no responsibility whatsoever for any direct or indirect consequential loss arising from any use of this report or its contents. In particu‐

lar, the report takes no account of the investment objectives, financial situation and particular need of individuals, who should seek further advice

before making any investment or rely upon their own judgment and acumen before making any investment. This report may not be reproduced,

distributed or published by any recipient for any purpose whatsoever. Action may be taken for unauthorized reproduction, distribution or publica‐

tion. The views expressed in this document are those of the Taurus Securities Research Department and do not necessarily reflect those of Taurus

securities or its directors. Taurus Securities Ltd., as a full‐service firm, has or may have business relationships, including investment‐banking rela‐

tionships, with the companies in this report.

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value call- oil & gas - may 29'2015

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